Nuvos or partnership pension?

Happenstance_2

I am about to start employment with the civil service and I have been asked to decide whether to join the nuvos or the partnership pension schemes. I've read through the information available but I am still rather confused and wondered if anyone could shed any light on which might be the best option?

As a bit of background I am single and in my late 20s and this would be my first pension.

Any help or advice would be really great!

jem16

Happenstance wrote: »

I've read through the information available but I am still rather confused and wondered if anyone could shed any light on which might be the best option?

Nuvos is a defined benefit scheme. It's a career average scheme and your pension is based on number of years service and pensionable earnings throughout. No investment risk to you.

Partnership is a defined contribution scheme where growth is dependent on staockmarket. All investment risk is with you.

Personally I would opt for Nuvos.

hugheskevi

Some things to consider:

• NUVOS is contracted-out of the State Second Pension, Partnership is not, so you would pay higher National Insurance contributions in Partnership, but also build-up more State Second Pension
• Partnership is non-contributory but matches contributions up to 3% (which you should make, if you choose Partnership)
• NUVOS contributions are 3.5% and may well increase from April, depending on your salary

Given the significant differences, it is hard to compare them.

A lot depends on the rate of return you think you might get in Partnership. If you think you will get about 6% or more each year on average, Partnership is likely to work out better.

Partnership gets better as contracted-out deductions fall and member contributions rise in coming years. From age 31 the employer Partnership contribution also rises. And you also build up State Second pension.

Personally I'd go Partnership - there are uncertainties, but on balance I'd argue the benefits of Partnership over NUVOS compensate for the uncertainty.

Caveat: There really isn't enough information to make any robust recommendations, so all of these are simply things to consider when you make your decision.

antonic

I would recommend that you dont join !

When I started back in 1988 I thought I would only be in for a couple of years .... 23 years later I have become institutionalized !

Now to answer your question, I would recommend NUVOS as its still (just) a Civil Service Pension.

Happenstance wrote: »

I am about to start employment with the civil service and I have been asked to decide whether to join the nuvos or the partnership pension schemes. I've read through the information available but I am still rather confused and wondered if anyone could shed any light on which might be the best option?

As a bit of background I am single and in my late 20s and this would be my first pension.

Any help or advice would be really great!

Goldenyears

Some other things to consider:

The effective employer contribution rate in Nuvos (mark1) is in the range 20-25%.
On the downside there is going to be Nuvos (Mark2) shortly with a less favourable accrual rate.

Personally on balance I would go for Nuvos

jamesd

A defined benefit scheme like Nuvos has considerable advantages so unless you have a strong reason for not liking it, go for that one. You can add a personal defined contribution pension of your own later if you like. This way you get a nice bit of diversification, with the government having the Nuvos investment risk and you having it for any personal pension you set up.

BobQ

This is a no brainer.

The Partnership pension is a stakeholder pension with an age related employer contribution (about 6% as I recall for someone of your age. If you pay in more the employer will match this up to 3% of salary. So for a 3% contribution you will get about 9% from the employer (read the booklet). BUT its invested in the stockmarket, so unless you have high confidence in the financial services sector's ability to make a high return on this its more risky than Nuvos.

As others have said this is provides a defined benefit income based on adding together a % of your salary each year throughout your career. Each year the amount earned in previous years is uprated by an inflation index. At present your contributions would be 3.5% In a couple of years a new scheme will replace this but its likely to be a similar career average scheme. You will probably end up paying 6% of salary (but this will depend on your actual salary). BUT to get an equivalent pension from a stakeholder pension like Partnership you would need an employer contribution of about 20%.

Its true that contributions to Nuvos and its replacement will rise over the next few years but there is nothing to stop changes to Partnership. Partnership is a poor substitute for Nuvos and will most likely deliver a much lower pension. The only benefit it offers you at present is that you do not have to pay contributions, but this too is likely to change.

So Nuvos - its a no brainer.

hugheskevi

So Nuvos - its a no brainer.

Assume aged 29, salary £22,000.

One year of Nuvos accrual is £506 of pension (£22,000 x 1/43.48), which is uprated for the next 35 years, so at NRA of 65 is worth £1,012 assuming CPI of 2% p/a.

One year of Partnership gets you a combined employee and employer pension contribution of £2,750. Assume 7% annual growth for the next 35 years, is £29,361.

Assume annuity rate of 3.5% (based on RPI linked rate with survivor benefits, with a slightly better rate to reflect CPI rather than RPI link), that is annual pension of £1,028 compared to the £1,012 from NUVOS (just looking at a single year of accrual here to compare)

7% growth might be generous, but on the other hand index linked annuity is assumed which is pretty expensive compared to flat-rate.

There are other considerations that should be factored into a proper comparison, and in particular higher NICs payable due to being contracted-in under Partnership, accrual of State Second Pension under Partnership, the 0.5% lower contribution rate this year in Partnership, growing to bigger amounts in future. Also need to factor in the likely unfavourable commutation rate for tax-free cash from NUVOS relative to 25% tax free cash from a DC scheme and the extra flexibility of the DC pot should the OP not have a partner at retirement, or be in ill-health. NUVOS probably offers more generous death benefits that Partnership.

But given those headline figures I'd argue it isn't a no-brainer, and is a lot closer than you might think, especially after the contribution rate increases.

BUT to get an equivalent pension from a stakeholder pension like Partnership you would need an employer contribution of about 20%.

That is the scheme contribution rate, averaged across all members. The nature of Defined Benefit schemes is that they are more generous to older members, particularly following the RPI-CPI switch which significantly reduced the value of NUVOS for younger members.

BobQ

hugheskevi wrote: »

But given those headline figures I'd argue it isn't a no-brainer, and is a lot closer than you might think, especially after the contribution rate increases.

You make several valid points and I agree that saying its a no brainer was going too far particularly given the higher contribution rates planned in NUVOS and its replacement.

As you illustrate a lot depends on what assumptions you make about investment return and inflation, and on what value you attach to the other benefits of the DB pension scheme.

You assume an investment return of 7% over a working life which you concede may be generous. Personally I doubt that the financial services industry is capable of sustaining this level of average investment return for the ordinary punter, net of its generous expenses. Also I suspect that annuity rates will be even less generous by the time the OP retires.

Partnership could of course do even better than you assume and be a better bet, but even on your projections I suspect most people would have a less stressful life in the DB scheme without the worry of whether the markets will or will not give them an adequate pension.

Clearly the OP needs to ask himself how lucky he feels!

atush

I agree.

Hugh makes a compelling case with his math. But that is assuming certain performance so I'd take the Nuvos as then you aren't the one carrying the investment risk.

Happenstance_2

Wowee there are some knowledgeable folk on here, thanks very very much- it is all making much more sense to me... why can't they just explain in clearly in their information! Sounds like I might be best opting for the Nuvos on the whole- I'm not someone who relishes risk and doesn't look like they would work out too far apart based on the maths above.. and I plan on sticking in the same field for a while which would mean I'd be in the pension scheme for the long haul. Going to sit down and re-read all the above now and have a think... but Nuvos is sounding the best so far